Commentaries (some of them cheeky or provocative) on economic topics by Ralph Musgrave, Durham, UK. This site is dedicated to Abba Lerner. I disagree with several claims made by Lerner, and made by his intellectual descendants, that is advocates of Modern Monetary Theory (MMT). But I regard MMT on balance as being a breath of fresh air for economics.

Basically, Franklin argues that a shortage of money leads to a semi-barter economy, which is inefficient. And he argues for money to be created in the form of bills of exchange with land being the collateral that backs such bills. Interestingly, he is aware of the Real Bills doctrine (or the idea behind it) namely that banks will only issue an amount of money or bills that the rest of the private sector actually wants or needs to do business, etc.

This summary is not 100% accurate.

I don’t guarantee the summary is entirely accurate, particularly as there are some convoluted passages I don’t understand. But hopefully the summary will give a flavour of Franklin’s arguments. In fact Franklin himself pleads for similar indulgence. He says, “As this Essay is wrote and published in Haste, and the Subject in itself intricate, I hope I shall be censured with Candour, if, for want of Time carefully to revise what I have written, in some Places I should appear to have expressed myself too obscurely, and in others am liable to Objections I did not foresee.”

700 word summary.

Franklin starts with four points, after which he lists another four points relating the SORT OF PEOPLE likely to favour and oppose a money supply increase. I’ll take all his points in turn including the above eight. I’ve put MY COMMENTS on Franklin’s ideas in brackets.

First, he claims that a shortage of money results in a high interest rate. And trade is discouraged because those with money will tend to lend it out at interest rather than invest in a business. As distinct from businesses in general, Franklin is particularly concerned about the price of land, and thinks that a high price for land is desirable because it encourages husbandry.

(Strikes me that a shortage of money will result in people paying a high price to borrow MONEY, but I see no reason it would result in a high price (in terms of person hours) to borrow anything else. A country that is short of money is a semi-barter economy. Trade is discouraged in that barter is inefficient, but not because of the “high price” of business assets.)

Second, Franklin claims an increase in the money supply has encouraged ship building.
(I expect he is right: I would expect more money to encourage specialisation, e.g. in shipbuilding.)

Third, a lack of money induces would be immigrants to migrate to countries with more money. This is a problem when those potential immigrants are what Franklin calls “Labouring and Handicrafts Men, which are the chief Strength and Support of a People”.

Fourth, lack of money encourages the consumption of European goods. Plus it encourages employers to pay their employees partially in kind rather than in cash (which is what you’d expect in a semi-barter economy).

The sort of people likely to favour and oppose a money supply increase.

1, Those currently engaged in money lending.
2. Those currently in possession of plenty of money, even if they don’t engage in money lending.
3. “Lawyers, and others concerned in Court Business.” The reason Franklin gives is that the legal business results in people going into debt (presumably to pay fines, etc).
4. Dependents on and friends of the above three.
In contrast, traders and manufacturers will favour a money supply increase.
Franklin then considers whether a money supply increase will debase the value of money, and he starts by pointing out that barter is inefficient. He then points out that gold and silver have often been used as money. But the value of precious metals varies. Franklin claims the value of silver in terms of person-hours shrank to a sixth is former value after large quantities of gold and silver were transported to Europe by Spaniards from mines in central America.

He then considers bills of exchange and points out their convenience.

Then he argues for bills based on land. He says, “For as Bills issued upon Money Security are Money, so Bills issued upon Land, are in Effect Coined Land.” Plus he points out that with America’s population rising, the value of land should continue to rise so there is minimal danger of the value of the collateral declining.

He gets the point that more than one factor gives money its value. He says, “Money as Bullion, or as Land, is valuable by so much Labour as it costs to procure that Bullion or Land. Money, as a Currency, has an Additional Value by so much Time and Labour as it saves in the Exchange of Commodities.”

In the paragraph starting “From these considerations” he doesn’t seem to think that an excess money supply leads to inflation. He does not give any good reasons in this paragraph. The really good reason comes in the next paragraph…..

In the paragraph starting “If it should be objected…” he gets the point that the population will only “coin land” (i.e. demand money) to the extent that money is needed in order to do business. This is essentially the “Real Bills Doctrine”.

There are also these later quotes from Ben, just after the Revolution.

Contrary to what history teaches, the American Revolution was not ignited by a tax on tea. According to Benjamin Franklin, it was because "the conditions so reversed that the era of prosperity ended."

He said: "The Colonies would gladly have borne the little tax on tea and other matters had it not been the poverty caused by the bad influence of the English bankers on the Parliament, which has caused in the Colonies hatred of England and the Revolutionary War."http://www.u-s-history.com/pages/h256.html

see also http://en.wikipedia.org/wiki/Currency_Act

some of the events of the day were arcane, e.g., http://en.wikipedia.org/wiki/Two_Penny_Act

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The above is now available in hardcopy from Amazon. Alternatively get your online version by clicking on the above image of the book front cover. The online version takes advantage of the “linking” facilities that are available online and not available on hardcopy. E.g. entries in the table of contents are linked to relevant pages in the main text. And works cited in the main text are linked to those works or to sites where such works can be bought or downloaded.

The above is an updated version of the MPRA paper which featured here recently.

Like the MPRA paper, the book is divided into three sections. The first is an introduction to full reserve. The second demolishes a large number of arguments (some of them very silly) put by “professional” economists against full reserve. The third rebuts some popular, but poor arguments FOR full reserve.

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Some of the articles appearing on this blog are reproduced by Seeking Alpha and Jefferson Tree.

I support PositiveMoney because I think that:...

1. Using money from 100% safe taxpayer backed bank accounts for commercial purposes is a subsidy of commerce, which is a misallocation of resources.2. People and businesses have a right to 100% safe accounts, but the relevant money should be kept in a 100% safe manner: at the central bank, where it may earn no interest.3. Where people and businesses want their money invested in commerce, that is laudable. They will earn some interest, but they are not entitled to taxpayer support.4. Fractional reserve banking promotes instability.

Note: I am NOT an official spokesperson for Positive Money. In fact I DISAGREE with some of their ideas, while of course agreeing with them on the basics.

Publications.

Peer reviewed publications:

1. A Market Imitating Employment Subsidy, in The Future of the Welfare State, (editor: Bent Greve), 2006, published by Ashgate.

Non-peer reviewed (or only lightly peer reviewed) publications. The coloured clickable links below are EITHER the title of the work, OR a very short summary (where I think a short summary conveys more than the title).

i) The above is not a complete list in that earlier versions of some papers have been omitted. For a more complete list see here, and “browse by author” (top of left hand column).

ii) 7 deals with a wide range of alleged reasons for government borrowing, including Keynsian borrow and spend. 6 is an updated version of the "anti-Keynes" arguments in 7. 5 is an updated version of 1, which in turn is an updated version of 4.

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Bits and bobs.

Voxeu article argues that Britain’s industrial revolution might not have taken place without high debt. Walter Bagehot said similar – or to be more accurate, he said that the ease with which money could be borrowed in Britain helped it industrialise.________

Ten years ago the Basel bank regulators were classifying Euro sovereign debt (including Greek debt) as zero risk. And now we’re supposed to attach importance to what the Basel lot think constitutes a safe bank.

Words fail me.________

A Portuguese, a Greek, and a Spaniard go into a brothel. Who pays?

The German.

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John Cochrane: "Joining a common currency is a pre-commitment against bad monetary policy as well as foreswearing of hypothetical good monetary policy. Political forces seldom think there's enough stimulus. When Greece and Italy they joined the euro, they basically said, defaulting and inflating now will be extremely costly. They were rewarded for the precommitment with very low interest rates. They blew the money, and are now facing the high costs they signed up for. But that just shows how real the precommitment was.________

"Europe is still a stay-at-home place compared with America. In 2011, 2.7% of Americans had lived a year earlier in another of the 50 states. By contrast, only 0.2% of Europeans had migrated since a year before.

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"Europe's nations should be guided towards the super-state without their people understanding what is happening. This can be accomplished by successive steps, each disguised as having an economic purpose, but which will eventually and irreversibly lead to federation." Jean Monnet (Founding Father Of The EU in a letter to a friend 30th April 1952).). ________

“Economics is extremely useful as a form of employment for economists.” - J.K.Galbraith.

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Why treat money lenders different from other businesses? Government never rescues badly run garages or restaurants, so why rescue money lenders (aka banks which lend)? The merest hint by government that it will rescue banks equals a bank subsidy. Alternatively if government makes it clear it will never rescue money lenders, then all of those funding those lenders become shareholders: that’s shareholder as in “someone who at worst stands to lose everything”. And that equals full reserve banking.________

Guardian interviews sociologist about Greece.

This should be a laugh.

The sociologist concerned, Jürgen Habermas, said amongst other things that “…Schaeuble threatened Greek exit from the euro”. Mein Gott. Wicked Herr Schaeuble. Given that countries OUTISDE the EZ have done better than those inside since 2007 according to this source, “threatening” Greece with Grexit seems to me a bit like “threatening” them with a cheque for ten billion Euros. If anyone wants to “threaten” me with a cheque for that amount, please go right ahead. In fact, out of the kindness of my heart, and humble generous fellow that I am, I won’t object if two or three zeros are knocked off that figure. But I’d prefer the full amount.________

Dear Agony Aunt,

Unlike most people who are looking for someone to love, I’m looking for someone to hate. Would you recommend Wolfgang Schauble?

Yours, Confused.

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The recent Greek fiasco has been a boon for the “more socially concerned than thou” professional weepers and wailers. For example James Galbraith (who I normally agree with) compares the allegedly cruel treatment by the EZ of Greece to the Soviet invasion of Czechoslovakia in 1968. Er…no. Greece is free to leave the EZ (i.e. do Grexit). In contrast, Czechoslovakia was not free to leave the Soviet embrace.________

Mark Carney tells a UK Treasury committee that the TBTF bank subsidy has not yet been disposed of. However, I couldn’t find any reference in the transcript of the committee meeting to deposit insurance which in the UK is funded by taxpayers rather than (as in the US) by some sort of self-funding FDIC system. Having taxpayers rather than banks themselves pay for deposit insurance is a subsidy and obviously applies to SMALL banks and other lenders, as distinct from “too big to fail” lenders.

Makes you wonder whether Carney and those committee members can recognise a bank subsidy when it stares them in the face. Or perhaps they’re deliberately keeping quiet about it, the better to fleece taxpayers. ________

This Bloomberg article quotes nine people who saw the Greek crisis coming many years ago. Three of them are leading MMTers: Stephanie Kelton, Warren Mosler and and L.Randall Wray.

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Normally I agree with Krugman, but not today. He accuses the technocrats running Greece of being unaware that “austerity has exactly the dire effects basic textbook macro says it will”.

Nonsense. I imagine they’re well aware that austerity has that effect. They’re imposing austerity so as to bring about internal devaluation, which in turn will eventually (20 years hence?) get Greek exports up and imports down and enable Greece to repay its debts.

Of course it can well be argued that internal devaluation is a socially expensive way of dealing with an external deficit. But that’s common currencies for you.

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The Euro was a political, not an economic project from the start. (E.g. see article by Richard Werner linked to just below). That is, eventual fiscal union was presumably what those architects envisaged . But now that we have a problem (i.e. Greece) which fiscal union would do much to solve, the architects have gone strangely quiet.

Are they just sitting in their retirement villas in the South of France and keeping quite because they’ve now realised that the costs of fiscal union would be too high for core countries and thus that fiscal union won’t work? I.e. are they keeping quiet because they realise they made an awful mistake?

Another lot of whinging lefties claim that Germany & Co are trying to force poor little Greece out of the EZ.

As you may have noticed, those two views flatly contradict each other. Will whinging lefties please make their minds on that one?

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Richard Werner: "When visiting Europe at the time (I was based in Tokyo in the 1990s), and meeting my peers, the chief economists at other banks, I would of course discuss what in my view was the highly worrying prospect of these plans to abolish the D-Mark. I was astonished by their reaction. About half of them insisted that those plans were so lunatic that, of course, they would not be implemented. This was a bad call, since the commitment to the single currency had been enshrined in the Maastricht Treaty in 1993 and the eurocrats were implementing a pre-ordained implementation plan resulting, by the end of the 1990s, in fixed exchange rates, and by 2001 a single currency.

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MUSGRAVE'S LAW SOLVES THE FOLLOWING PROBLEM.

The problem. Deficits and / or national debts allegedly need reducing. The conventional wisdom is that they are reduced by raising taxes and / or cutting government spending, which in turn produces the money with which to repay the debt. But raised taxes or spending cuts destroy jobs: exactly what we don’t want. A quandary.

The solution. The national debt can be reduced at any speed and without austerity as follows. Buy the debt back, obtaining the necessary funds from two sources: A, printing money, and B, increasing tax and/or reduced government spending. A is inflationary and B is deflationary. A and B can be altered to give almost any outcome desired. For example for a faster rate of buy back, apply more of A and B. Or for more deflation while buying back, apply more of B relative to A